So, you’ve probably heard of NNN (Triple Net) leases if you’re in the commercial real estate game. They’re a go-to structure, especially for folks who want to kick back and let their property do the work. But what exactly are they all about?
What Are NNNs
So, what exactly are NNNs? Well, think of them as the three musketeers of lease agreements – tenants agree to pay for property taxes, insurance, and common-area maintenance (CAM) expenses.
Calculating NNNs is a bit like solving a puzzle. We crunch the numbers by projecting the total expenses for the year, divvy it up by the square footage of the building, we’ve got a monthly charge per square foot for each tenant.
To be more precise, a triple net lease is one in which the tenants agree to pay their pro-rata share of all expenses associated with the common-area maintenance of the building (referred to as CAMs), the property taxes, and the insurance. Once those numbers are calculated, they are written into each tenant’s existing lease agreement via what is known as an amendment to the lease. Each month, the tenants are responsible for paying their predetermined “base rent” amount plus their estimated monthly triple net amount.
Triple nets are typically calculated by projecting the total amount of expenses for the coming year, dividing it by the total rentable square footage of the building, and then dividing that by 12. This calculation gives you a monthly dollar-per-square-foot amount to charge each tenant. You would then multiply that number by each tenant’s square-footage use of the property in order to find out how much each tenant will actually pay each month.
Benefits of NNN Leases
In order to understand the benefits of a triple net lease, we first have to look at an alternative type of lease called the “gross lease.” In a gross lease, the tenant pays a single base-rent amount each month, and the landlord is responsible for paying for the insurance, property taxes, and CAMs. The landlord is therefore incentivized to charge a higher base rent amount in order to ensure that their rental income is sufficient enough to cover all expenses and turn a profit.
One benefit of triple-net leases is that they allow the landlord to advertise their rental space with a lower base rent amount, which can attract more renters. While tenants must then pay an additional amount in triple net costs, this amount is shared by all tenants and can be minimized with proper and efficient management.
Another benefit is that it incentivizes tenants to take responsibility for the care of common areas of the property. For example, tenants at a shopping center may be more inclined to keep the trash enclosures clean and clear for the weekly trash pickups so that they do not end up paying for increased service or special pickups.
Triple net leases also encourage longer-term leases, such as five to ten years (or even more), since landlords have the assurance that changes to their operating expenses over time will be shared with their tenants.
Also, in a triple net lease, the tenant is usually 100% responsible for any and all work/repairs that are needed within their own rentable space and which do not pertain to common areas of the property. This generally leads to lower turnover rates and a very hands-off investment for the landlord, particularly when a skilled and experienced property management company is used to enforce the lease and determine any annual changes to the triple net amount.
Lastly, triple net leases are generally seen by banks and other lenders as relatively stable investments since they involve a greater level of responsibility for the tenant. This, in turn, makes it more likely for investors to secure better loan terms. They can also be very attractive to potential buyers, which makes selling easier.
